The oil drilling industry and the U.S. government have made significant improvements in their assessment of the risks of and readiness to mitigate future catastrophic spills in the Gulf of Mexico. The risk of such an incident is no doubt lower than it was prior to the Deepwater Horizon disaster. Despite recent positive achievements, however, we are poised to fight the previous war—not the next one—if we do not learn the true lessons from the spill. The bottom line is that much needs to be done by Congress, the regulators, and the industry to ensure a safer future in deepwater drilling.

Industry faced powerful incentives to avoid a catastrophic spill prior to the Deepwater Horizon incident. These incentives were apparently inadequate, however, to address the increased risks of drilling at new depths. Along with several other RFF researchers, I recently studied the costs and benefits of deepwater drilling and concluded that existing liability laws do not fully cover the costs of catastrophic spills. My colleagues and I argue that Congress needs to provide stronger incentives for industry to invest in safety, risk reduction, and spill response and containment technologies. Among the specific recommendations are: (1) raise liability caps to reflect the risks posed by deepwater drilling; (2) establish commensurate financial responsibility requirements; (3) require third-party insurance to increase external monitoring; and (4) develop risk-based premiums if insurance pools are used.

Lesson 2: Deepwater drilling is riskier.

Despite claims to the contrary, deepwater drilling is indeed riskier—and neither the industry nor government had prepared themselves for the increased challenges posed by deeper depths. In recent examination of oil production data in the Gulf, my colleagues at RFF and I found that even controlling for levels of production, facility complexity, company in charge, distance to shore, and other factors, the probability of a company-reported incident (such as fire damage, injuries, or pollution) increases with water depth. Ultra-deepwater drilling is simply more complex and risker. For example, moving from a water depth of 500 feet to 5,000 feet increases the annual probability of an incident from roughly 10 to 70 percent. This finding is true even when looking at only the top 10 oil producers in the Gulf.

What might the government and industry do to adequately assess these risks? First, they need to improve risk assessment methodologies and establish clear thresholds. For example, industry and government should partner to collect detailed incident data and build analysis capability to more fully develop a quantitative risk-assessment model (similar to the “precursor analysis” developed and used in the United States in the nuclear industry). Based on models such as this, quantitative thresholds should be adopted to specify unacceptable risk levels and tolerable risk levels—this approach is used by many other U.S. government agencies that regulate risks. Second, regulators should increase the use of performance-based risk management. For example, the “safety case” approach that has been used in Norway and the United Kingdom for offshore oil and gas development should be considered.

Lesson 3: Without strong third-party oversight, neither industry nor government should be relied upon to adequately ensure safety in deepwater.

First, we need to recognize that the capacity of our government regulators is wholly inadequate. While our offshore oil production and royalties have dramatically increased over the years, the regulatory enforcement budget of the Minerals Management Service (now the Bureau of Ocean Energy Management, Regulation and Enforcement, or BOEMRE) has not kept pace. Government pay scales, training budgets, and capacity are simply too low to maintain the level of expertise needed to keep up with the latest technologies and challenges facing the deepwater drilling industry. Given these limitations, we must find mechanisms to marshal the expertise of academics and the private sector as partners and as independent monitors. Among the many opportunities for such oversight are: (1) an independent safety review board to investigate offshore accidents, (2) regular third-party audits of the government-required Safety Environmental Management System (SEMS), (3) required third-party technical review of containment and response plans before approval built into the permitting process, and (4) more public oversight of industry efforts to invest in research and development in spill prevention, containment, and response technologies. In addition, requiring third-party insurance would create a powerful independent monitor of drilling activity.

Lesson 4: We’ve been here before—let’s not fight the last war.

Following the lack of response readiness that was apparent during the Exxon Valdez spill, the industry created a consortium to invest in oil spill response technologies and readiness. Yet, in the 20 years following the Exxon Valdez spill, little investment and innovation took place, and the industry simply was not prepared for the next big spill. This is not surprising, given the lack of strong incentives and government oversight. Following the Deepwater Horizon incident, the industry came forward with an aggressive response to build a containment system that would be ready in a matter of days (compared to the three months required to contain the Macondo well). Both the newly formed Marine Well Containment Corporation (MWCC) and Helix Corporation have put into place new containment systems, such that BOEMRE has begun to reopen deepwater drilling. While I am not questioning the judgment to reopen drilling (as I do not have the technical background and knowledge required to assess the current drilling permit applications), we need to understand the limitations of the MWCC and Helix solutions: (1) even if effective as designed, they will only fight the last war, and (2) there are inadequate incentives for innovation and improvement beyond our current capacity. For example, the MWCC and Helix solutions are not designed to contain a spill scenario such as encountered in 1979 off the Gulf of Mexico when the Ixtoc I drilling rig fell on the well. Nor can they capture spills that occur at the ocean floor. Without government oversight, scenario planning, and ongoing research and development spending, we are simply preparing only for what we’ve experienced thus far—while technology keeps pushing the limits of our drilling capacity.

The RFF team that examined deepwater drilling has produced a series of seven papers analyzing these and other issues related to the incentives and regulatory approaches used to prevent future catastrophic spills from occurring. Details of our team’s findings and recommendations are available on the RFF website. As we continue to drill deeper, the technology will become more sophisticated and the risks will only grow. These risks might be acceptable—but only if there is serious consideration of the costs and benefits of drilling and containment and response technologies.